Robotic-assisted surgical procedures have fallen off steeply as the ongoing global pandemic has unfolded, but the real impact on Intuitive Surgical Inc. will come as its hospital customers may have to limit orders for expensive equipment upgrades as they struggle to manage unprecedented financial burdens. The U.S. accounts for about 70% of its robotic surgery procedures, but by the last few weeks in March, that activity had been curtailed by roughly two-thirds.

The Sunnyvale, Calif.-based company was able to coast a bit on the strength of the initial months of the first quarter in its most recent earnings. But it has little visibility into when procedure volume will rebound – although that is starting to happen in Asia as the rate of COVID-19 infection has receded – or for how long cash-strapped hospitals could limit their purchases of major equipment.

Wall Street is upbeat, pulling the company’s shares (NASDAQ:ISRG) higher by about 4% this week. However, Intuitive’s roughly $60 billion valuation is still much lower than the more than $70 billion market cap it achieved in mid-February.

Procedure recovery?

The company offered detailed weekly country-level data on procedure volume, which suggest that, assuming the COVID-19 outbreak is increasingly under control across its major markets in the U.S., Asia and Europe, surgical procedure volume with Intuitive equipment could start to recover meaningfully in early June.

“Encouragingly[,] China is showing a steady recovery of procedures[,] while other countries in Asia[,] such as Japan and Korea[,] have seen limited impact. Europe and North America finished 1Q at run rates down about 50% and about 65% respectively,” summed up BTIG analyst Ryan Zimmerman. “Discussion centered on how hospital customers may emerge from the pandemic and what impact these dynamics may have on Intuitive’s overall demand.

“System demand is likely to see the largest negative impact as financial pressures force hospitals to focus on maximizing capacity before considering purchases,” he continued in an April 16 note. “Leases and alternative financing will continue to grow (expected to grow to about 40% or higher in subsequent quarters) dampening near-term unit sales and likely dragging into 2H20. Procedure recovery dynamics vary across specialty[,] but our working assumption is now early June on average before procedures improve at some scale.”

Intuitive and Wall Street already expected 2020 to be an investment year for the company, as it works to upgrade its robotic surgery offerings in the face of ever-expanding competition in a field it has long dominated. It’s aiming to keep innovation on track by updating R&D facilities to enable more physical distance so employees can work safely, but it did acknowledge that clinical trial activity will slow as a result of the pandemic. Intuitive also is enhancing its capacities for remote training and skills retention work, a key function for the company in its relationship with surgeons.

Phase II anticipation

For the U.S., Intuitive said it has adopted the phased framework outlined in the American Enterprise Institute's national coronavirus response to guide its expectations moving forward.

These were crafted and are being promoted by former FDA Commissioner Scott Gottlieb and presume a minimal level of 750,000 COVID-19 tests per week – something that the U.S. isn’t close to achieving at this time. They also anticipate widespread use of an accurate serological test that is predictive of COVID-19 immunity, which also is not yet the case.

The U.S. remains in phase I, which is focused on stopping the disease spread. Phase II, which involves a gradual reopening of the economy by states, presumes controlled disease spread and sufficient testing to enable routine contact tracing. Intuitive expects to see a resurgence of patient need at that point for some more urgent deferred procedures with its Da Vinci systems.

“We're planning for phase II to return to surgery for those patients who cannot wait,” said Intuitive President and CEO Gary Guthart on the earnings call. “Those countries that have been managing the disease the longest have returned to Da Vinci surgery steadily over time or have been able to maintain Da Vinci surgery concurrently with COVID care.

“We are analyzing the order in which different procedures are likely to return and the strategies likely to be employed by hospital systems to manage surgical practices while still providing COVID care,” he added. “For example, some health systems are dedicating specific sites to COVID care, while operating rooms for outpatient surgeries are dedicated in other locations. We will support customers closely as they bring capabilities back online.”

Limited visibility

During the first quarter, Da Vinci procedures grew about 10%, compared with 18% during the same period in 2019 and 19% during the prior quarter. The company attributed that growth rate to an uptick in U.S. general surgery procedures and worldwide urologic procedures.

Revenues in the first quarter were $1.1 billion, an increase of 13% vs. the first quarter of 2019. The company shipped 237 Da Vinci Surgical Systems, an increase of 1% compared with 235 in the first quarter of 2019. Intuitive beat analyst consensus first-quarter revenue expectations by about $90 million, while the earnings per share of $2.69 was higher than anticipated by $0.15.

Intuitive withdrew its prior 2020 financial guidance April 8 and continued to caution that the relatively limited impact of COVID-19 during the first quarter was not indicative of what to expect in the future.

“The current situation in hospitals responding to viral care is fluid, and the depth and duration of this disruption is difficult to predict. New issues are arising with respect to surgery that will require mitigation and time,” summed up Guthart on the long-term outlook for Intuitive. “Some hospital customers and some of our suppliers will experience significant financial stress in this period. Regulatory agency priorities and resources are shifting globally as they devote their resources to infectious disease detection and treatment needs.”

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